Essays on CEO characteristics and firm behaviour in China : a thesis presented in fulfilment of the requirement for the degree of Doctor of Philosophy in Finance at Massey University, Manawatu campus, New Zealand

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This thesis consists of three essays. Essay one investigates the effect of chief executive officer (CEO) pay disparity on firm performance using a large sample of Chinese listed firms from 2005 to 2018. It is found that CEO pay disparity is associated with better firm performance. This result supports the rank-order tournament theory that a large pay disparity between the CEO and non-CEO top executives provides non-CEO top executives with strong tournament incentives to work harder for promotion of the next CEO. Further analysis indicates that CEO political connection and CEO tenure significantly weaken the effectiveness of tournament incentives because politically connected CEOs and CEOs with long tenures are more powerful and tend to entrench themselves. Moreover, the positive promotion-based tournament effects are reduced by female and older non-CEO top executives since they are less sensitive to tournament incentives. In addition, we examine the effectiveness of the 2015 “pay ceiling” regulation and find that this regulation significantly reduces CEO pay disparity and the positive tournament effect on firm performance in state-owned enterprises (SOEs). Our results suggest that CEO pay disparity can be used an effective corporate governance mechanism in improving firm performance and policy-makers should thoroughly consider potential side effects when limiting top executives’ compensation. The second essay examines the influence of CEO early-life experience on accounting conservatism. Using China’s Cultural Revolution (1966–1976) as a shock to risk attitude, this study finds that CEOs who experienced the Cultural Revolution in their early life are more conservative and risk-averse, thus leading to a higher level of accounting conservatism. We further document that political influence can moderate such positive association. In particular, the Cultural Revolution effect is more pronounced in regions with higher political risks and in SOEs. Additional analysis suggests that CEOs with early-life Cultural Revolution experience tend to increase firm’s provisions for liabilities and decrease accrual-based earnings management, indicating the risk-averse attitude of such CEOs. Our findings add new evidence to support the upper echelons theory and the imprinting theory by highlighting the important role of CEOs’ early-life traumatic experience in affecting firm financial reporting behaviour. In the third essay, we also focus on CEOs’ early-life Cultural Revolution experience and study its impact on stock price crash risk. We find that CEOs with early-life Cultural Revolution experience are negatively and significantly associated with stock price crash risk. This finding indicates that CEOs who experienced the Cultural Revolution in their early life are more risk-averse and less likely to hoard bad news. Further analysis indicates that such a negative association is more salient in firms with higher litigation risk, e.g., when firms are subjected to major lawsuits, in high-litigation risk industries, and in provinces with better legal development. In addition, the channel analysis suggests that CEOs with early-life Cultural Revolution experience tend to reduce corporate earnings management and tax avoidance, explaining the negative effect of CEO early-life experience on crash risk. These findings also support the upper echelons theory and the imprinting theory. Overall, this thesis documents the essential role of CEO characteristics on managerial decision-making and firm behaviours.
Chief executive officers, Attitudes, Corporate governance, Decision making, Psychological aspects, China, History, Cultural Revolution, 1966-1976